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Cypriot lawmakers must make it easier for banks to seize property when borrowers default to tackle the issue of bad loans, the country’s most pressing issue, central bank governor Panicos Demetriades said.

Borrowers who intentionally fail to repay loans need to be reined in, Demetriades said in an interview on Tuesday in Athens. A possible political fight may delay planned legislation to tackle the Mediterranean nation’s stock of bad debt, he said. The law is required under the country’s 10 billion-euro ($13.8 billion) international rescue put together a year ago.

“There’s a lot of strategic default happening,” Demetriades said. “Borrowers need to know that there’s a consequence when you don’t pay. It’s still the case that the banks are not able to basically carry out any repossessions in any meaningful timeframe. That’s the top priority now, to address NPLs,” or non-performing loans.

A holdup in addressing bad debt could, as happened in Greece, hamper Cyprus’s plan to recover from a financial crisis that came close to forcing the country out of the euro. Demetriades, who also sits on the European Central Bank’s Governing Council, steps down on April 10 after resigning in the wake of a long-running feud with Cypriot President Nicos Anastasiades. Demetriades declined to comment on the circumstances of his resignation. Demetriades will be succeeded by Chrystalla Georghadji, the country’s auditor general.

Rising unemployment, falling credit and the bad-debt stock are the challenges facing Cyprus’ bailout program implementation and the road to recovery, according to an International Monetary Fund staff report published on Tuesday.

While the economic adjustment program remains on track, the risks to implementation “remain significant,” the IMF report said. The IMF joined with the euro area in providing aid to Cyprus.

Lawmakers are set to consider a bill to strengthen lenders’ powers of foreclosure when borrowers default. According to the IMF, about 50 percent of total loans in the domestic market are classed as non-performing, nominally worth 22 billion euros.

“There will be difficulties as regards this legislation,” Demetriades said. “I see the legislation as a deterrent to strategic default,” he said, adding that “there’s a lot of politics” surrounding the discussion.

Cyprus’s bailout last year was the first in the euro area’s debt crisis to involve the imposition of capital controls, as authorities targeted uninsured savings to plug the gaps left by losses suffered by the banks. The Central Bank of Cyprus also extended Emergency Liquidity Assistance, or ELA, that remains a liability of the largest restructured lender, Bank of Cyprus Pcl.

“The misunderstanding about ELA in Cyprus is that it is thought the public are going to repay it,” Demetriades said. “No, they are not, as long as confidence returns and deposits come back to the banking system.”

Cypriot banks’ reliance on the emergency funding, which is the responsibility of the national central bank and not the ECB, stood at 9.55 billion euros at the end of February. Demetriades said there’s about 1.5 billion euros of excess cash circulating in the economy that could be used to shore up the deposit base of the banks.

These are “bank notes that have been withdrawn from the banking system, under mattresses,” Demetriades said. “Some have been put in ovens and partly burnt and some have even been eaten by mice, and we’ve had to replace them. We get requests every month to replace worn or damaged bank notes. People are keeping too many bank notes at home.”

Demetriades said that if Cyprus sticks to the reform plan set by the international creditors and tackles non-performing loans, capital controls could be gone by the end of the year.

A return to confidence in Cyprus, which has been divided since a 1974 Turkish invasion of the north of the island, could be boosted by “concrete” measures toward reunification, Demetriades said.

President Anastasiades and Turkish Cypriot leader Dervish Eroglou agreed on a framework for talks on reunification in February. Economic output is projected by the European Commission to contract by 4.8 percent this year after shrinking 6 percent in 2013.

“It is certainly a very promising development, and it could have a major positive impact on the recovery of the economy if it progresses,” Demetriades said, referring to the talks. “That could help to get Cyprus out of recession and into recovery mode a lot earlier.”

Demetriades said a mooted plan to rebuild the ghost city of Famagusta would be a suitable confidence-building measure. Greek Cypriots fled the Varosha area of Famagusta following the invasion. The area was fenced off by the Turkish army and has been sealed ever since.

“It would help the process of renegotiation. The rebuilding could be undertaken with construction companies and workers from both sides,” he said. “It could be a major boost for cooperation.”